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Is the iPhone Really Unpopular at T-Mobile?

Last weekend, my Foolish colleague Sam Mattera suggested that Apple's (NASDAQ: AAPL) iPhone is doomed to be unpopular at T-Mobile (NYSE: TMUS) . Unlike the other major U.S. wireless carriers, T-Mobile does not subsidize smartphone purchases (although it does offer payment plans). Theoretically, at least, this should incentivize consumers to gravitate toward cheaper Android smartphones.

T-Mobile does not offer smartphone subsidies, which could hurt sales of pricey handsets.

Indeed, in Q2 -- the quarter when T-Mobile began selling the iPhone -- iPhones represented only 21% of T-Mobile's smartphone sales. In Q3, that dropped to just 10%, well below the iPhone's market share at AT&T (NYSE: T) , Verizon (NYSE: VZ) , or Sprint (NYSE: S) .

However, while T-Mobile's value focus and lack of smartphone subsidies are both impediments to the iPhone's success there, it's premature to assume that Apple can't make any headway at T-Mobile. Indeed, the release of the newest iPhones in late September will likely result in a big jump in Apple's market share there in the current quarter. Over time, iPhone adoption at T-Mobile is likely to move much closer to the U.S. average.

Familiar storyiPhone adoption in the U.S. varies widely by carrier. While there are a number of explanations for this phenomenon, the most important reason is that the various wireless operators became Apple carrier partners at different points in time.

AT&T was the exclusive home of the iPhone in the U.S. until 2011. As a result, it has maintained a large base of loyal iPhone users. In last year's Q4, a stunning 84% of all AT&T smartphone sales were iPhones!

Verizon and Sprint introduced the iPhone in February and October of 2011, respectively. Prior to launching the iPhone, both carriers had to promote the Android platform heavily as an alternative. As a result, the iPhone has never achieved the dominant position it enjoys at AT&T with Verizon or Sprint. As of last quarter, iPhone sales made up 51% of the total at Verizon, and around 28% of the total at Sprint.

In this context, the iPhone's lower market share at T-Mobile is less worrisome. Based on the experiences of Verizon and Sprint, it seems to take quite a while for iPhone demand to spool up. In T-Mobile's case, this was probably aggravated by the fact that rumors about the next iPhone were already circulating by the time T-Mobile launched the iPhone 5 in April.

Looking for a bounceT-Mobile received the new iPhone 5s and iPhone 5c handsets "on time" in September, but the carrier faced particularly severe supply constraints initially. As a result, nearly all of the early upgrades to the iPhone 5s were pushed to Q4 at T-Mobile.

T-Mobile did not have much supply of the new iPhone 5S until Q4. Photo: Apple.

The high percentage of Android users among T-Mobile's current user base and the lack of subsidies will likely keep iPhone penetration below 50% of new sales at T-Mobile for the foreseeable future. However, given the strength of demand for the 5s, it would be surprising if the iPhone does not exceed the 21% share it achieved at T-Mobile in Q2.

Further gains could come in 2014 if Apple launches a larger iPhone, as many tech analysts expect. Android vendors have increasingly turned to larger screens as a means of differentiating their handsets from the iPhone. An iPhone around the 5-inch size range would be a great tool for Apple to convince some Android users -- many of whom use T-Mobile -- to switch to the iPhone.

Foolish bottom lineWhile the iPhone has a minuscule market share at T-Mobile so far, that has more to do with the late launch than anything specific to T-Mobile. Even if the iPhone's "ceiling" at T-Mobile is lower than at AT&T or Verizon, there is still plenty of upside compared to its relatively low share in the last two quarters.

Q4 will be critical for understanding how successful the iPhone can be in the subsidy-free environment at T-Mobile. For the first time ever, T-Mobile is participating in a new iPhone launch. If the iPhone's market share at T-Mobile continues to languish this quarter, then it might be reasonable to conclude that T-Mobile subscribers just aren't interested in the iPhone.

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Comments from our Foolish Readers

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they treat customers like a ball. on the web they sell unlock phone. after bought it the phone is lock. even paid full price.they tell go to apple to unlock. apple tell us to call t-mobile to unlock. I never come to t-mobile buy a phone again.

The numbers may be accurate but has the "analyst" considered T-Mobile's share of market and the customer profile. If you look at the larger Mobile providers you will Alonso find that the lower end low ARPU customers do not necessarily go for iPhone. It is like saying that lots of people by Ford cars and therefore Porsche, BMW etc. are in trouble!

@JackBaker1: If you thought that the point of this article is that Apple has a problem at T-Mobile, then you should re-read it. My whole point is that the iPhone's doing fine at T-Mobile and will probably gain share this quarter.

@TheWick: Again, I don't think that Apple is in trouble in any way at T-Mobile. Yes, T-Mobile has a lower-income subscriber base on average, but that alone doesn't explain the discrepancy. T-Mobile has some customers who will be drawn to cheap Android (or possibly Windows) phones, but there are plenty who will pay extra for high-end devices. Over the next year or two, I think Apple will get its fair share of these customers.

In the US, Android still has a significant lead on Apple's iOS (iPhone).

Apple's glory days are over. They haven't produced anything interesting in a while, and many of their ideas are glorified refurbished ideas of other inventors that they seal with thousands of patents.

Android is the new dominator, and will remain so because of how open and flexible it is. Apple would have to change dramatically in order to keep competing with android, otherwise Android is going to completely crush out iOS in a couple years.

>> I think it's also important to note (about the article) and it isn't trashing the iPhone. It's just pointing out the trends among different carriers.

He is actually suggesting that iPhone sales will rise on T-Mobile after people get adjusted to the fact that T-Mobile is selling the iPhone

@rhealth

T-Mobile has been making major strides. Once they are able to get a hold of lower frequency spectrum, which will allow their towers to go 7-12x as far as they currently do with their higher frequency spectrum, then they'll be able to challenge VZ and AT&T. Until then, they seem to be smart enough to build out only in dense areas where they can continue to profit.

AT&T actually lost post-paid/contract subscribers in the past couple of quarters (has only been able to gain subscribers due to prepaid plans)

I was a T-Mobile customer for 10 years, I just switched to att for iphone 5s. The reason I went with Att because Att sell iphone 5s cheaper than Tmobile, $400 at ATT with 2 years contrast,$800 with Tmobile no contrast. I told Tmobile I don't mind signing another contrast or upgrade the plan if they sell the same price with ATT. Tmobile said "no" upgrade plan still $800. That is why I left Tmobile

Everyone keeps talking about these cheaper Android phones. The Galaxy S series is the best selling phone series next to the iPhone. It's not cheap. The HTC One isn't cheap. The Sony Xperia Z isn't cheap. I see more lower income people with AT&T than I do T-Mobile but I know more high income people ($250,000 a year plus) who have T-Mobile. I'm a wise investor. I could either put my money in AT&T and pay over $300 a month or I can pay T-Mobile $170 a month for unlimited everything. It's a poor business decision to pay over $1000 a year for lesser service.

@briankh: Other than the Galaxy S, those aren't high volume models. Including all of the Androids priced at over $500 (including the Galaxy S and Note), you have maybe 15%-20% of the Android phones sold worldwide. Even for Samsung, the high-end phones are in a distinct minority.

For now, the high-end phones still dominate the U.S. market. With subsidies as high as they are, why would you even consider a sub-$400 phone? I don't expect this to change anytime soon. But with T-Mobile moving away from subsidies, capable midrange ($200-$300) phones are a much bigger threat to Apple AND Samsung.

Sending report...

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry! Follow @AdamLLW